Consumption and credit: A model of time-varying liquidity constraints

Sydney Ludvigson

    Research output: Contribution to journalArticlepeer-review

    Abstract

    This paper studies the optimal consumption behavior of individuals who face borrowing limitations that vary stochastically with their income. This framework is motivated by new empirical evidence that I document in U.S. aggregate data: predictable growth in consumer credit is significantly related to consumption growth, a finding that is inconsistent with existing models of consumer behavior. The time-varying liquidity constraint model considered here correctly predicts two key properties of the U.S. aggregate data: the correlation of consumption growth with predictable credit growth documented in this paper, and the well-known correlation between consumption growth and predictable income growth that has been documented extensively elsewhere.

    Original languageEnglish (US)
    Pages (from-to)434-447
    Number of pages14
    JournalReview of Economics and Statistics
    Volume81
    Issue number3
    DOIs
    StatePublished - Aug 1999

    ASJC Scopus subject areas

    • Social Sciences (miscellaneous)
    • Economics and Econometrics

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